(Bloomberg) — California's public retirement fund holds so much power over local officials that pension-bond investors can't expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems "unfair."
U.S. Bankruptcy Judge Meredith Jury on Monday threw out a lawsuit in which investors had claimed their pension bonds must be paid off at the same rate as the California Public Employees' RetirementSystem in the San Bernardino bankruptcy. The $304 billion fund is the biggest in the U.S.
Jury acknowledged that her decision may discourage investors from buying pension-obligation bonds in the future.
"What I see as unfair, and might seem unfair to the outside world, does not matter under law," Jury said, referring in part to the powerful remedies Calpers can seek if the city doesn't honor its contract.
Monday's ruling sticks with a pattern seen in the bankruptcies of Stockton, California, and Detroit, said Marilyn Cohen, president of Envision Capital Management in El Segundo, California.
An investor who buys pension-obligation bonds "is just asking for trouble," said Cohen, who manages $345 million for individual investors. The cities' bankruptcies show that pensioners and municipal employees have an advantage over bondholders, she said.
'New Template'
"That's the new template," said Cohen, who recommends that her clients buy revenue bonds and avoid municipalities with high pension obligations.
San Bernardino filed for bankruptcy in 2012, blaming the high cost of fire and police labor contracts, including pensions. At first, officials balked at paying Calpers before other creditors. After months of mediation, the city agreed to repay Calpers in full and maintain normal monthly contributions on behalf of its employees.
By the end of the month, San Bernardino must file its debt- reduction plan, which will give bondholders an idea of how much they may recover. Any proposal must go to creditors for a vote before Jury makes a final decision.
Jury's ruling on the pension debt wasn't a surprise, said Robert D. Gordon, an attorney at Clark Hill PLC. Gordon represented pension systems in Detroit's record-setting municipal bankruptcy.
Contract Rights
Calpers has a contract to provide services to San Bernardino, which gives it different legal rights than the debt contract with bondholders, Gordon said.
In Detroit, pension bondholders owed about $1.4 billion were forced to take deeper cuts than city workers and retirees, some of whom recovered more than 90 percent of what they were owed.
